The Fallacy of Traditional Stock Investment Beliefs

I have come to expect a few things about “security investing”: Bonds move opposite from stocks, the majority of investors are better off purchasing index funds, and stockbrokers just don’t understand how futures work.

This is the typical dialogue of an investor and his stockbroker:

Stockbroker: Good morning, Bob! Glad to see you again. How may I help you today?

Investor: Well, Mr. Smith, I have squirreled away some extra money, and I want to invest in futures or forex.

Stockbroker: Why would you want to do that?

Investor: Well, I heard that there was a lot of opportunity, and I have seen gold triple in value over the last few years.

Stockbroker: Listen to me, Bob. Is it okay if I call you Bob? Listen, Bob, forget about it. Gold, schmold, what you need is some sound investment advice. Remember that gold stock I got you into last year?

Investor: Yeah, it’s down 30%.

Stockbroker: Bob, remember, we’re in it for the long haul. Buy and hold, buy and hold. In fact, since it’s cheaper, stockmarket ideas we need to buy more. We buy more now, we can make up for that 30% loss that much quicker.

Investor: Well… I guess.

Stockbroker: Bob, let’s look at the big picture. The price is cheap for this and a few other gold-mining companies. If the price of gold is going up, we need to get some more of these other companies in your portfolio while it’s still low. Bob, are you listening to me?

Investor: I hear you. If you think this is the best way.

Stockbroker: Of course, I think this is the best way. Who in their right mind would want to buy and sell actual gold? It’s too risky.

Investor: The gold-mining companies do it, right?

Stockbroker: Exactly, Bob, so don’t waste your time.

This is the typical exchange between an investor and his stockbroker. While the investor may see the logic of skipping the middleman and buying the actual gold, the stockbroker can’t or won’t. Often, the reason they can’t see the logic is that they are simply not licensed or trained to give their clients advice about futures and forex investing.

Futures and Forex Investing Is Not New

In later chapters we will go in depth on the origins of futures and forex, but to suffice it to say that various forms of futures contracts have been around for hundreds of years. The current forex environment, while fairly new, is patterned, in many ways, after the futures market contracts.

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